Damage Assessment

January 2, 2013

• “Disaster Narrowly Averted!” scream the headlines: The 5 performs a few judicious edits
• Tallying the “fiscal cliff” damage already done… and anticipating still more faux D.C. drama
• How businesses will respond to Congress’ late-night lunacy… and for PRO readers, an easy way to profit
• Water bottle bans, a stripper tax, another incandescent light bulb bites the dust: How the world-improvers have rung in 2013 (for your own good, of course)
• Terrorists love gold too (uh-oh)… the dangers of bureaucrats taking you too literally… an “entitlement” thought experiment… and more!

  “The United States averted economic calamity on Tuesday,” reports Reuters with a straight face. We begin the new year dying to edit this news headline. Here’s our version:

“The United States postponed certain economic calamity on Tuesday.”

Alas, we haven’t understood the term “fiscal cliff” since we first looked up the term anyway. Only in Washington are measures intended to restore fiscal sanity considered a threat. Best we could tell at the time: Fiscal cliff is “a term Democrats apparently wield to scare voters into thinking they’d be better off with higher taxes.”

To no one’s surprise, the White House and Congress did just that. The House signed a version of the Senate’s bill late last night. The president added his John Hancock. And… your taxes will go up.

[Ed Note. We had intended to begin the year by taking a look at our 2012 forecasts and stacking them up against reality. Unfortunately, the narcissism of our political process has once again overwhelmed our schedule. Back tomorrow... with a proper look at how the year panned out. And a look at what you can expect in the new year.]

  In the meantime, as the can clamors down the scree, let’s calculate the damage. Apologies in advance if you’re still suffering a pernicious New Year’s hangover:

•  The “Bush tax cuts” are now permanent — or as permanent as anything is in Washington — except for…
•  Couples who make more than $450,000 will revert to Clinton-era rates (single $400,000). In addition, their tax rate on dividends and long-term capital gains jumps from 15% to 20%
•  Itemized deductions and the personal exemption start phasing out on couples’ incomes above $300,000 (single $250,000)
•  Remarkably, the dreaded alternative minimum tax (AMT) has been patched “permanently”
•  The estate tax exemption falls from $5.2 million to $5 million; the rate jumps from 35% to 40%.

  The employee portion of the payroll tax reverts to the pre-2011 rate of 6.2%. That means taxes will rise for 77.1% of U.S. households, according to the Tax Policy Center.

At least the Social Security “trust fund” will get a few more worthless IOUs, so it’s all good, right?

  What about spending cuts, you ask? Heh.

$30 billion in spending was added: Extended unemployment benefits — the straight-up welfare program that kicks in after the 26 weeks of insurance runs out — will carry on for another year.

  At least we’re guaranteed a few more political “showdowns” before the first blossoms of spring. Otherwise, what would we do with our time?

The $110 billion in automatic spending cuts that were supposed to kick in yesterday — the “sequester” that was part of the summer 2011 debt ceiling deal — have been put off till the end of February.

A “continuing resolution” — quick-fix legislation to cover for the fact lawmakers can’t draw up a real budget — expires on March 27.

If you have an excellent memory — or a government contract — you will recall the last of those items nearly triggered a “partial government shutdown” in the spring of 2011.

We should be so lucky.

  While all this was going on, the government unceremoniously bumped up against the debt ceiling again on Monday.

Or so Treasury Secretary Timothy Geithner says: Treasury’s own website is updated only through last Friday. It pegged the national debt at $16.336 trillion — $58 billion below the ceiling of $16.394 trillion.

The Treasury is now resorting to borrowing from government pension plans, as they did 18 months ago, to make ends “meet.”

Ha. Ha. Ha.

  “Apart from doing little to reduce our long-term deficit and debt,” reads a press release that landed in our inbox this morning. It’s from (yet another) Washington advocacy group; this one assembled to speak on behalf of Millennials — the 20-somethings who are going to be left with the bill. On the advisory panel… our friend David Walker, protagonist of I.O.U.S.A.

“The ‘deal’ fails to adequately address the biggest problem facing young people today: unemployment stemming from an uncertain economy.

“Under the proposed plan, businesses will continue being too scared of what the future holds to make new hires.

“Until Washington can come up with a real deal to fix the debt, we are left to assume that by the time it’s our turn to be in charge, so much of the money coming in will be going to pay down past spending that we’ll have no way to confront the unknown challenges of the future.”

  Worse yet, “in 2013, tax rates will go up on high-income households… but tax receipts will fall,” notes our macro strategist Dan Amoss.

“If politicians want economies that aren’t addicted to constant stimulus, they’re following the wrong playbook. Deficit spending and money printing ultimately destroys the middle class. Inflation will eat up any benefits from redistribution of income through the tax code.”

Indeed, says Dan, “many businesses will intentionally depress their taxable income. One way to depress 2013 income is to withhold the reinvestment of last year’s income in the business. The productive capacity of the economy will suffer.”

A depressing prospect… but there’s still a way to play that trend for profit. And it doesn’t involve anything complicated like options or short selling. We describe it below in today’s 5 Min. Forecast PRO — our new “sixth minute” that delivers actionable advice on The 5′s analysis.

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Starting tomorrow, we’re going to give you an additional chance to offer praise… or suggestions for improvement. If you’re a current reader of The 5, you’ll automatically be entitled to two weeks of The 5 Min. Forecast PRO — for free!

Watch your inbox for the formal announcement later today.

  The way Wall Street’s rallying today, you’d think Congress had accomplished something more profound than putting an infected Band-Aid on a gaping wound.

But it is what it is: As we write, the Dow has topped 13,300 and the S&P sits at 1,450.

“Cash holdings, a drag on returns for pros when the market is in rally mode, are likely to get put to work,” wrote Fusion IQ chief and Vancouver favorite Barry Ritholtz anticipating a rally before the open. “Much of the panicky selling that was in anticipation of much higher capital gains and dividend taxes will also be redeployed back into equities.”

For the record, the Dow ended 2012 up 7%… the S&P gained 13%… and the Nasdaq added 16%.

  For no obvious reason, gold spiked big around lunchtime on Monday… locking in a 7% increase for the year. This morning, precious metals are sharing in the general “risk-on” trade: Gold is up to $1,693, silver to $31.43.

  Crude is also rallying; at $93.61, West Texas Intermediate sits at a level last seen in mid-September. Still it’s about $10 cheaper than it was when 2012 began.

The spread between WTI and Brent remains substantial. At last check, Brent was trading for $112.39… almost $20 more expense than the locally brewed stuff. The spread between WTI and Brent kicks off the year reflecting the boom in energy production here in the U.S. versus the lack of fracking technology in the North Sea.

  U.S. factory activity is back in growth mode. The ISM manufacturing survey clocked in this morning at 50.7. The index has spent the last six months jumping around the 50 dividing line between expansion and contraction.

  As the new year dawns, it seems even terrorists are beginning to appreciate the value of real money. On Monday, an al-Qaida offshoot called al-Qaida in the Arabian Peninsula (AQAP) offered a bounty on the head of the U.S. ambassador to Yemen… payable in gold.

AQAP is offering 3 kilograms of gold — worth about $160,000 — for killing ambassador Gerald Feierstein. The group is also offering $23,000 payable in Yemeni riyals for any U.S. soldier killed inside Yemen; there’s a small detachment of troops there serving as “advisers.”

  The town that witnessed the first live rounds fired during the American Revolution now has the distinction of being the first city in the country to… (drumroll)… ban single-serving plastic water bottles. As such, they top a sampling of things you’re no longer allowed to do in 2013.

Effective yesterday, the sale of plain drinking water in plastic bottles of one liter or less is banned in Concord, Mass. An environmental menace, supporters of the ban argued — an argument that, uh, carried water with a slender majority at a town meeting last year, 403-364.

“Local government and special interest groups should not be dictating to residents what they can eat, drink and buy,” objects Concord resident Adriana Cohen. “Those are core civil liberties that should not be encroached. Especially in a free-market economy driven by consumer choice.”

Free market? Consumer choice? How quaint.

“There are still so many choices [people] can make,” says Jill Appel, a supporter of the ban, “and that this is just a very small thing.”

And that’s how it starts.

  In Illinois, shark fin soup is now verboten. As we noted last year, a ban already exists in California and Oregon.

• Owning more than four cats is not kosher in Wellington, Kan., anymore…
• If you want to release wild pigs in Kentucky, forget it… should have thought of doing so by Dec. 31, 2012…
• And now, when you enter a strip club in Illinois, you’ll pay a $3 fee on top of any cover the club charges. At least, the proceeds will go to charity. (Not the dancer…)

  Oh, and… say goodbye to the 75-watt incandescent light bulb.

As of yesterday, the 75-watt incandescent no longer meets “energy-efficiency” standards. Under legislation signed by President Bush in 2007, manufacturers and retailers can unload their existing 75 watt supply, but after that’s gone, no more. The 100-watt variety went bye-bye last year. Next year, the 60- and 40-watters get their turn.

Hope you love the blinding glow of white halogen as much as we do. The meddlers are even trying to destroy the ambiance of your living room!

(If you’re being subjected to a new petty regulation or bureaucratic nuisance, we’d love to add it to our list: please write us here.)

  “One of your recent items brought to mind my experience with our local city council a few years back,” writes a reader, quick on the draw.

“I planned to tear down my older residence and replace it with a duplex and had the plans drafted professionally and submitted to the town planners for a building permit. At their once-a-month meeting, the powers that be examined the plans and my permit was denied because the draftsman had drawn in a bush and a fence to enhance the picture.

“The plans were not permitted but returned to me with the bush and fence circled with handwritten comments. What kind of bush is this? What type and material is the fence made of?

“I went the mayor’s office. He agreed the permit failure was ridiculous. He called a special meeting and the plans were OK’d.”

The 5: Who says government can’t work for the people?

  “I saw repeated reference,” writes a reader haplessly trying to follow the fiscal cliff debate over the holidays, “to trimming and/or controlling the entitlement programs of Social Security and Medicare, effectively at gunpoint. I paid dearly for these programs.”

“It seems to me,” the reader goes on, “that through the years, actual entitlements were added to Social Security and Medicare — welfare without having to declare welfare or fund it (except, of course, for the poor schlubs who had to actually pay into the system). Widows and orphans who get benefits without ever having made a direct or indirect contribution to the system.  The rapidly rising disability claims from those who have never paid, directly or otherwise, into the system.

“Strip these entitlements out of Social Security and Medicare and put them into a welfare program that can be dealt with as entitlement without messing with Social Security and Medicare. I wonder what would be the impact of such a long-overdue adjustment.”

The 5: We may never know. The programs are untouched in the bill signed by the president. Not even “chained CPI” (intended to further reduce the cost-of-living adjustment for Social Security) made it through.

Cheers,

Addison Wiggin
The 5 Min. Forecast

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